Greece debt crisis heads to a flashpoint: What happens now?

The European Central Bank (ECB) said on Sunday that it would not expand the emergency loan programme that has been propping up Greek banks. But it did not cut off support entirely, keeping the banks alive. Prime Minister Alexis Tsipras, who says the ‘troika’ of the ECB, IMF and European Commission has been unfair to Greece, got Parliament’s approval for a public referendum on July 5 on the debt negotiations. Greece’s current bailout package runs out on June 30, and it will most likely default on repaying the IMF € 1.5 billion, and another € 5.2 billion in short-term bills. Greece has shut its banks for a week. If it goes bankrupt or decides to leave the Eurozone, the instability in the region will reverberate worldwide.

How did Greece get to this point?

Greece became the epicentre of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, it announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of its national finances. It was shut out from borrowing in the financial markets, and by the spring of 2010, it was veering toward bankruptcy. As a new financial crisis loomed, the troika issued, one after another, two international bailouts, totalling more than € 240 billion. But the lenders imposed harsh austerity terms, requiring deep budget cuts, steep tax increases, an overhauling of the Greek economy, streamlining government.

So why didn’t things improve still?

The money was supposed to buy Greece time to stabilise its finances and quell market fears over the integrity of the Euro union. But it mainly goes toward paying off Greece’s international loans, rather than making its way into the economy, which has shrunk by a quarter in five years. Unemployment is over 25%. The government can’t begin to repay its massive debt unless a recovery takes hold.

Many economists, and many Greeks, blame the austerity measures for their problems. The leftist Syriza rode to power promising to renegotiate the bailout; Tsipras said austerity had created a “humanitarian crisis”. But creditors, especially Germany, blame Athens for failing to conduct the economic overhauls required under its bailout. They don’t want to change the rules for Greece.

How did the latest situation arrive?

Athens struck a deal with European officials on February 20 to extend the bailout programme for four months in exchange for € 7 billion. But creditors say Greece’s plans fall short, and accuse Tsipras of trying to roll back the austerity measures unilaterally. Greece needs a deal, and Tsipras seems to be betting that the troika will want to reach a compromise to avoid the huge unknowns of Greece defaulting or possibly leaving the Euro. Athens also needs to pay € 2.2 billion in public sector salaries, pensions and social security payments, and has no money to do so.

Is Greece’s € 320 billion debt mountain insurmountable?

For a country like the USA, it isn’t. For Greece, the lenders are tougher. In 2012, it defaulted on financial lenders whose risks didn’t pay off. This time, political institutions and state funds are involved.

WHAT HAPPENS NOW?Likely debt default, a referendum, maybe exit

What happens in Greece today?

After Sunday’s failed meeting of Eurozone finance ministers, Germany said Greece remains part of the Eurozone. However, Berlin has said in the past that the cost of keeping Greece in could not be ignored altogether — and should the ECB, which has capped emergency loans at € 89 billion, shut the tap completely, Greek banks would collapse and a Grexit would be inevitable.

Greece will almost certainly default on the nearly € 7 billion it owes in June. Eurozone officials have warned the nature of the standoff would change fundamentally once the bailout expires. And yet, an IMF default — to which Athens owes € 1.5 billion — will not force Greece out of the Eurozone. Credit rating agencies are worried only about dues to private creditors, and governments are unlikely to activate cross-default clauses.

How crucial is the July 5 referendum?

Besides the payments due on June 30, Greece owes the IMF and ECB another over € 10 billion over July and August. Which means it needs another bailout package — its third since 2010. Tsipras has called the Eurozone offer “unbearable”, and is pushing for a ‘No’ on July 5 — even though he has said his government would respect a ‘Yes’ too. However, Eurozone leaders are sceptical. Some in Syriza want the government to resign in the event of a ‘Yes’. Should that happen, it would likely be replaced by a technocratic regime of the kind that was at the helm during the 2011 crisis. Since the bailout would have expired on June 30, this government would have to renegotiate the deal. A deal, once struck, would still have to be ratified by all Eurozone governments, including, in Germany, a vote in Parliament. And the whole process will need to be completed by July 20, when Greece must repay the ECB € 3.5 billion. A default will bring Grexit extremely close. July 5 will in effect test whether Greeks want to stay in the Eurozone. Or Athens might want to check out if Russia or China might help it Europe won’t.

Will leaving Eurozone benefit Greece?

While some of the world’s biggest financial services players believe Greece can adopt a new currency over time, no one expects the process to be painless or free of costs. Also, no one can predict the economy, if freed from the Eurozone, will flourish. Bank of Greece has said Grexit might bring deep recession, huge joblessness and crashing incomes. Greeks would lose savings, Greece could become an international credit market pariah, and political instability could bring a coup.

What about Eurozone and the world?

Grexit will wreck the understanding that Eurozone is a club you don’t leave — and affect certain kinds of investors and companies. What happens in Greece will have ripples. Spanish anti-austerity party Podemos is watching Tsipras’s gamble closely; Angela Merkel will be mindful of voter blowback to a debt writedown; anti-EU groups like France’s National Front and Britain’s UKIP will be able to say more vocally that integration can never work. If Greece leaves the Eurozone, it can be expected to be less cooperative with Europe over taking on the migrant surge from North Africa and West Asia. If Athens drifts towards Moscow, it will unlock a whole new set of geo-political circumstances — and complications — for the West. Finally, though the chances of Grexit triggering a domino are slim, a contagion could hit countries like Ireland and Portugal.